"There's no question this puts Sprint in a very difficult position," said Kenneth Rehbehn, principal analyst at the Yankee Group.

Sprint recognizes that the imbalance will significantly change the industry. And in its statement issued Sunday night, the company urged regulators to take a close look at the merger.

"The combination of AT&T and T-Mobile USA, if approved by the Department of Justice (DOJ) and Federal Communications Commission (FCC), would alter dramatically the structure of the communications industry. AT&T and Verizon are already by far the largest wireless providers. A combined AT&T and T-Mobile would be almost three times the size of Sprint, the third largest wireless competitor. If approved, the merger would result in a wireless industry dominated overwhelmingly by two vertically-integrated companies that control almost 80 percent of the U.S. wireless post-paid market, as well as the availability and price of key inputs such as backhaul and access needed by other wireless companies to compete. The DOJ and the FCC must decide if this transaction is in the best interest of consumers and the U.S. economy overall, and determine if innovation and robust competition would be impacted adversely and by this dramatic change in the structure of the industry."

The sheer size of its competitors with respect to Sprint is certainly an issue, but the merger between AT&T and T-Mobile is also bad news for Sprint for a number of other reasons.

For one, T-Mobile has been one of Sprint's primary sources of subscribers, according to equities analyst Craig Moffett at Bernstein Capital. He wrote in a research note to investors on Monday that a combined AT&T/T-Mobile will likely reduce churn on T-Mobile's network, which could dry up new subscriber growth for Sprint.

For nearly two years, Sprint had been rumored to be eyeing T-Mobile for an acquisition. The companies have also admitted that they have pondered a possible partnership between T-Mobile and Clearwire, which is building a 4G wireless network using 2500 MHz spectrum from Sprint. Nothing ever materialized from these discussions. But if T-Mobile is gobbled up by AT&T, Sprint no longer has a potential telco partner to share the cost of the Clearwire network build.

"Sprint will now be left having to fund Clearwire on its own, with future development costs likely falling in a multibillion-dollar range," Moffett said in his research note. "Despite the difficult network economies posed by Clearwire's 2.5 GHz spectrum, it is still in Sprint's interest to see Clearwire succeed, given the size of its investment. A deal with T-Mobile would clearly have offset this burden in part."

The spectrum crunch and 4G
In addition, a deal between T-Mobile and AT&T, strengthens AT&T's spectrum position, which ultimately makes Sprint more vulnerable as it goes up against AT&T and Verizon Wireless, which both have very strong spectrum positions for the future.

"It would have been Nextel all over again, and look how long it's taken Sprint to rationalize that acquisition."

--Kenneth Rehbehn, Yankee Group analyst

"With T-Mobile out of the picture, there are no large blocks of spectrum left for Sprint to use in the future for LTE," Rehbehn said.

Sprint committed early to using WiMax as its technology of choice for a 4G wireless network. And it partnered with Clearwire and dedicated its 2500MHz spectrum to build the nationwide WiMax network. But since the companies began building the WiMax network, it's become clear that the rest of the world--including the two dominant wireless operators in the U.S.--are using LTE for their future mobile networks.

Sprint CEO Dan Hesse has said repeatedly that the company remains committed to WiMax, but insiders have hinted that LTE could be on the carrier's road map. Clearwire has also indicated that LTE could be used on its network in the future. But some experts are skeptical that the high-frequency 2500MHz spectrum that Sprint and Clearwire are using to build the WiMax network will work well for LTE.

A tie-up between T-Mobile and Sprint could have given Sprint more spectrum with which to build an LTE network. T-Mobile has built itself a strong backhaul position, investing a lot in recent years in fiber and other infrastructure that connects its cell towers and base stations to the traditional Internet and phone networks.

Now, it looks like T-Mobile's AWS spectrum and its gussied-up backhaul will go to AT&T, which it plans to use to strengthen its own network. And a stronger AT&T, means bad news for smaller competitors. T-Mobile has good coverage in cities, such as New York City, which AT&T could leverage to alleviate problems it has in those markets. And it can use the AWS spectrum to eventually add capacity to its LTE network.

Still, a merger between Sprint and T-Mobile would have been a nightmare for Sprint.

"It would have been Nextel all over again," said Rehbehn. "And look how long it's taken Sprint to rationalize that acquisition."

Sprint bought Nextel, which used a network technology called iDEN, in 2005. While Sprint gained more customers through the acquisition, it is still--six years later--struggling to integrate the iDEN network with its own CDMA network. Meanwhile, Sprint continues to bleed former Nextel customers every quarter.

T-Mobile also uses a completely different technology from Sprint, called GSM. And trying to integrate a Sprint CDMA network with T-Mobile's GSM network would have been difficult.

What's next for Sprint?
Some industry observers wonder if Verizon Wireless might make a bid for Sprint. The two carriers both use CDMA. And like the deal between AT&T and T-Mobile, a marriage between these two major players would offer a wide variety of spectrum options for a combined carrier.

"As we move into the next era of wireless, spectrum is what matters," said Rehbehn. "Spectrum translates to bandwidth and that's what is needed in future wireless networks."

But such a deal would certainly be scrutinized by regulators.

"The regulatory hurdle for Verizon to acquire Sprint would be much higher than it was for Verizon to acquire Alltel," said Ross Rubin, an analyst with NPD Group. Verizon bought Alltel, a regional CDMA player, in 2009.

There is a chance that Sprint might join forces with a regional wireless player. Leap Wireless, which owns the Cricket brand, is expanding its network in an attempt to become a national carrier. Leap also uses CDMA and could be a good merger candidate for Sprint. What's more, Leap is also building an LTE network, which could give Sprint its LTE future.

A merger between Sprint and a smaller wireless provider would likely be encouraged by regulators, since it would bring more customers to Sprint, making it easier to compete with the No. 1 and No. 2 players.

Meanwhile, Sprint is doing the best it can to compete in the existing market. Specifically, it is trying to differentiate itself by offering customers what it considers a more open experience. For example, on Monday, Sprint announced it plans to integrate Google Voice into its cell phone service.

The integrated Google Voice service will allow Sprint customers to use a Sprint phone number as a Google Voice number. Sprint is also allowing Google Voice users to use the Google Voice services, such as voice mail, instead of Sprint's own voice mail services. In short, the company is allowing a third party to control some of the customer experience on its devices.

This is significant because Sprint is giving up control of the customer experience to some extent in order to enable this service. But in return, Sprint is opening up some of its services to a third party that can continue to innovate and create new and better experiences for customers.

"Letting go of some things opens us up to more markets," said Kevin McGinnis, vice president of Product and Technology Development for Sprint. "Over the last two years we have shown far more innovation than our competitors in this respect. We've focused our development resources on enabling an innovative ecosystem."

The big question is whether consumers will value this "openness" enough to choose Sprint over its two biggest competitors. The jury is still out on that. But Sprint is making headway with consumers. Even though Sprint is still losing customers every quarter, it has managed to slow the losses.

"We've always strived to differentiate ourselves by being open to third parties," McGinnis said. "So that's not a new idea for us. And we don't think any of the recent events will require us to change that. We're staying the course."

About the author

Marguerite Reardon has been a CNET News reporter since 2004, covering cell phone services, broadband, citywide Wi-Fi, the Net neutrality debate, as well as the ongoing consolidation of the phone companies. E-mail Maggie.
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